Friday, August 22, 2008

Income Inequality in the U.S. Correspondent Anne S. responded to Saved by U.S. Savings? Don't Count On It (August 20, 2008) with this wide-ranging commentary on rising income inequality in the U.S. Anne touches on many large, complex drivers such as healthcare and education which are often ignored in the "ideology wars" over income distribution (Right= re-distribution: bad, Left=re-distribution: good):

As Charles points out, we should always remember distribution of wealth or income. Averages can be very misleading. Massive research attests to the fact that financial inequality has grown in the US in the past 30 or so years. Naturally enough, other inequalities follow. The pattern of inequality may be different in different places, various social strata, groups, etc. However, let's set that aside, or leave it hanging, and consider the overall rising slopes of the costs of things in the US as presented in the entry, CPI 1978-2004.

Are the changing costs related to rising use, consumption, benefits, bonuses, gains of some kind?The rise in educational attainment is respectable. For 1970-2007, the % of Whites with 4 or more years of college passed from 11 to 31; for Blacks 6 to 18. (1)

For health care, balancing gains and advances with losses, regressions for 1975-2005 is hazardous. Many US health stats have sunk in this period; and new, better treatments have emerged. Health is tricky, as it is linked not only to care but to life-style, nutrition, the work place, epidemics, climate, etc. Using country comparisons, it appears that health care in the US is the most expensive in the world, and in terms of performance or outcome ranks extremely low, often bottom when compared to other OECD countries.

Possibly: health care costs in the US today could be cut by a third for the same, or possibly even a better, result. The rise in cost from 1978 has not been accompanied by strong, demonstrable, consequent 'better health' overall (beware of social change, ceiling effects, shoddy indicators, AIDs, etc.)

In these areas, with their truly rising costs, intangibles like knowledge and well-being created by human activity are sold. The use of resources is not too extravagant - classrooms, operating theaters, pills...It is the rise of the 'knowledge economy' or in other terms the institutionalization of a cadre class through education and 'merit', often inherited through wealth and status, which itself acts like a positive feedback loop: more expertise = more knowledge = more education = higher pay = more cost... > more education, > higher costs, etc. Once such mechanisms get going, a coterie of servants, middlemen, bureaucrats and profiteers shows up. Health insurers and banks (student loans) come to mind.

Higher education and health represent a larger, expanding slice of family budgets. The outlay is often perceived as unavoidable, obligatory, and in the top mid to upper classes, worth saving for, or marrying for, or cheating for, or, going into debt for...

Yet, with overall 'ordinary' budgets strapped or maxed out, both areas now are subject to uncertainty in decision making, investment, and increased risk (failure, sudden illness, etc.) To save, one needs to be in an environment which has a certain stability, where decisions can be tied to future expectations, and where saving is perceived as rational and useful.

For food, cars and transport, the picture is different. In some constant measure, or as % of family expenditure, very roughly here, in the past 40 years, costs have sunk, stayed similar, or risen somewhat. Americans have used, consumed more per capita (cars, planes, roads, food), done so with more comfort, splash, gadgets and/or efficiency (e.g. cars, take-out) - the extra cost, if any, seems well accounted for. Food is somewhat particular: Americans *have* eaten more (see (2) for the rise, probably underestimated, of consumption in all food groups except dairy - 1970-2006) but the quality of food has deteriorated and overeating has had negative impact on health for those not in the dominant class.1. Educational Attainment by Race and Hispanic Origin, 1940–20072. The Overflowing American Dinner Plate (chart, NY Times)

Thank you, Anne, for this thoughtful, nuanced commentary. There are many subtle threads in Anne's comments; I will mention a few that struck me (and of course I will undoubtedly miss many others).

I think Anne is describing the growth of a "new elite" which feeds off the institutional/bureaucratic fiefdoms of healthcare and education which have largely escaped global competition.

She is also pointing out that some increased consumption--for example, more fatty foods and more meat--may well have been detrimental to the populace, running counter to the Standard Ideology that "more consumption is always better."

As she notes, people whose parents have college degrees are statistically much more likely to obtain higher-education degrees. Though the system remains "merit-based," the reality is that inherited wealth and status (as defined by higher education, income, healthcare, etc.) do play a major predictive role. Nonetheless, mimorities in the U.S. have made great strides in terms of higher education (see link above).

To me, these are key points: "Intangibles like knowledge and well-being created by human activity are sold; higher education and health represent a larger, expanding slice of family budgets."

In other words, manufactured goods like TVs and computers have plummeted in cost in terms of purchasing power as China and Asia's emergence as low-cost manufacturers has lowered the cost of virtually all goods which can be shipped, while "services" like healthcare and education which cannot be shipped have risen steeply and inexorably.

While "medical tourism" to India, Thailand and Mexico is rising--i.e. going abroad to obtain heart surgery for 10-20% of the cost of the operation in the U.S.-- global competition is still a small influence on the institutional fiefdoms of healthcare and education.

What I note is that the cost structures of these fiefdoms have few meaningful constraints imposed by competition. Anne touches on one reason: as "merit" and "status" play roles in gaining admission into the "new elite" of these well-funded, protected fiefdoms, then the middle classes (low, median and upper) perceive some relative competitive advantages to getting their kids into Ivy League or high-status private/public universities.

At the same time, rising expectations for a long, healthy life are running up against an ever-rising healthcare cost structure and a pernicious cycle of declining well-being due to excess consumption and "lifestyle" diseases. Beyond a certain point, the more you eat, the lower your well-being. Endless "entertainment" (watch 8 NFL games on one screen! I actually saw that guaranteed insanity-inducing "excess" hyped on commercials during the Olympics) has enabled a "couch potato" lifestyle with all the attendent chronic diseases.

I wonder how much fear plays a part in this seemingly desperate battle to squeeze into the ranks of the "new elite" living off the competitive-free fiefdoms. If you fear you won't measure up, then what's your response? Find some "protected" enclave--an enclave protected by legislated fiat (tariffs, subsidies, etc.) or by barriers to global wage arbitrage and global competition.I have long suggested that the only real driver for lowering the cost structure of healthcare in the U.S. will be 100+ major state-of-the-art hospitals across the border in Mexico which cater exclusively to Americans with cash, clinics which provide the same level of care for 25%-30% of the cost of the care in the U.S.

The choice for U.S. healthcare will then be, adapt or die. Creative destruction is the core of capitalism. Fear-based moat-building and the garrisoning of fiefdoms protected from global competition can only stave off the destructive forces of bloated cost structures and inequality for so long.

So much of the "growing inequality" debate is cast into the ring of taxes and income re-distribution via "tax the rich and give entitlements to everyone else." But that ring is simply too small to account for the deep cultural and economic forces at work on macro scales and generational timelines.

More on oil and demand destruction: Frequent contributor U. Doran sent in this well-researched article on "demand destruction" for oil in the U.S.: Oil Demand Destruction & Brittle Systems which plays into my thesis presented yesterday that the vast majority of demand is inelastic and not subject to huge declines:

I've seen a number of comments, both at TheOilDrum and elsewhere, suggesting that the US is now less susceptible to supply disruptions because we have reduced our demand for oil by several hundred thousand barrels per day over the past year.

In general, I get the sense that people think we can insulate ourselves from supply disruptions, from our dependence on potentially unreliable foreign sources of oil, by improving our efficiency and eliminating "unnecessary" oil consumption.

In my opinion, this is backward. In this post, I will argue that, because the demand that is destroyed first in a free market is the demand that is easiest to eliminate, the resulting consumptive system is more inelastic, more brittle, and more susceptible to systemic shock from supply disruption. I will approach this argument by outlining what makes a system either resilient or brittle and why market-driven demand destruction creates a more brittle system. I will conclude with a few thoughts on how we can increase the resiliency of our energy-driven economy in a future environment of declining energy supplies.

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